Japan’s Recovery at Risk of Stalling on ‘Premature’ Tax Rise Fears Nobel Economist Stiglitz

By Ambrose Evans-Pritchard – January 23, 2014

The Telegraph

Japan’s bold drive to end almost two decades of deflation and economic decline is in danger of stalling this year as the country raises consumption tax before recovery is secure, Nobel economist Joseph Stiglitz has warned.

“We are hitting a moment of fragility, there is a significant risk that growth will sputter just as it did in 1997 when they raised VAT too soon,” said Prof Stiglitz, speaking at the World Economic Forum in Davos.

The economy is already losing some momentum as the initial “sugar rush” of stimulus wears off. While prices are beginning rise — with core inflation reaching 0.8pc in November — this has so far been caused by rising import prices due to a 25pc yen devaluation. There is little sign yet that the stimulus is filtering through to higher wages, the crucial hand-over if recovery is to become self-sustaining.

Prof Stiglitz said premier Shinzo Abe is pursuing a “risky strategy” by raising the consumption tax from 5pc to 8pc in April. The worry is a cliff-edge fall in sales this Spring. “The tax rise has been pre-announced so people have been buying goods in advance,” he said.

Mr Abe is hoping that a 2.4pc cut in corporation tax will blunt the shock, relying on a trickle through to higher wages. This could go badly wrong. “If they tried this in the US it wouldn’t happen. Corporations would just pay themselves bigger bonuses, and they would probably do the same in the UK,” he told the Telegraph.

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